The Effect of macroeconomic variables on stock return volatility in the Nairobi Securities Exchange (NSE)
Under the Kenya vision 2030, the financial services sector aims at creating a vibrant and globally competitive financial sector promoting high-levels of savings and financing for Kenya's investment needs. It also aimed to ensure macroeconomic stability as well as reducing the volatility of returns in Nairobi securities exchange. This study aimed at investigating the macroeconomic variables and stock market return volatility in Nairobi securities exchange limited. The study focused on of inflation, exchange rates, economic growth, emerging markets emerging markets portfolio flows, financial account of balance of payment changes and interest rates as the macroeconomic variables under study. Arbitrage pricing theory was used to link the macroeconomic variables and the stock market return. Annual published time series data from 2007 to December 2017 was sourced from CBK, KNBS and NSE. The secondary data was analyzed by first calculating the monthly averages for each variable in Excel. The averages were then be transferred to STATA version 12.1 software for further analysis. Descriptive statistics such as mean score, skewness, kurtosis and standard deviation was estimated for all the variables. Toda and Yamamoto Granger causality was applied to establish the causal relationship between the set of macroeconomic variables and the NSE 20 share index while Power Garch model was employed to determine the volatility. Regression analysis technique is used to determine the relationship between two variables. Information was presented inform of tables. The study found that emerging markets portfolio flows, financial account of balance of payment and interest rates explained 76.4% of the changes in stock market return volatility in Nairobi Stock Exchange. It was also established that changes in emerging markets portfolio flows would lead to 0.812 increase in stock market return volatility in NSE Listed firms, that changes in financial account of balance of payment would lead to 0.743 increase in stock market return volatility in NSE listed firms and that interest rates would lead to 0.419 increase in stock market return volatility in NSE listed firms. The study concluded that emerging markets portfolio flows had the greatest impact on the stock market return volatility in NSE listed firms followed by financial account of balance of payment while interest rates had the least impact on financial account of balance of payment and interest rates. The study recommends the government through its policy makers should come up with policies that will help stabilize Foreign exchange rate, Interest rate and Inflation rate fluctuation thus creating investor confidence in the securities market. Further the study recommends that the independent regulatory bodies such as Capital Markets Authority and visionary system of government can contribute towards the development of an efficient working and development of the Kenyan Stock Market.